Is It a Hard or Soft Credit Inquiry?

When you apply for a new credit card or set up a loan for a house or car, the lender will verify your credit history by requesting a copy of your credit report. This request may be tracked in your credit history and could affect your credit score. It all depends on who’s looking at your credit report and why they’re doing it.

Requests to look at someone’s credit history are referred to as credit inquiries. There are two types of inquiries, hard and soft. Hard inquiries are associated with lending decisions, while soft inquiries typically involve credit checks that aren’t tied to specific purchases or loans. Each one is treated differently on your credit report.

When you apply for a credit card, auto loan or mortgage, the lender gets your permission to ask one of the three major credit bureaus, Equifax, TransUnion or Experian, for a copy of your credit report. Personal loan and apartment rental applications may also require access to your credit report. The information in your report is used to help determine if you are likely to pay back a loan or credit card or make monthly rental payments. This type of credit report request generates a hard inquiry, also known as a hard pull. In general, a hard inquiry will be listed on the borrower’s credit history and will remain there for at least two years.

Soft inquiries, or soft pulls, typically involve background checks, employer checks and verifications for pre-approved credit card and insurance offers. Checking your own credit history will also generate a soft inquiry. This type of inquiry on your credit history does not require your permission, so you usually aren’t aware when it occurs. Many soft inquiries aren’t noted in your credit history; those that are have no impact on your credit score because the credit scoring models used by the major credit agencies don’t consider soft inquiries.

A single hard inquiry isn’t likely to change a borrower’s credit score, but multiple inquiries within a period of a few months could lower the score. A low credit score due to multiple hard inquiries is a potential red flag for lenders who want to stay away from overextended borrowers. Even if a borrower’s score isn’t lowered significantly by multiple hard inquiries, a lender may find the number of inquiries problematic.

One of the biggest problems with hard inquiries for consumers is the fear of lowering your credit score just because you’re shopping around for a low credit card or loan rate. According to Experian, credit scoring models try to take this into account. Your score shouldn’t be lowered for having multiple hard inquiries for auto loans, mortgages or student loans within a short time period. Groups of these inquiries are bundled together and treated as a single hard inquiry.

Experian reminds consumers that a credit score is determined by several factors, including payment history and the ratio of credit card debt to the amount of available credit, also known as the credit utilization ratio. You can minimize the impact of hard inquiries on your credit history by limiting the number of credit cards and charge accounts you apply for. When shopping for a new home or auto, try to limit your loan applications to a short time frame such as 30 days.

It’s also good to show some restraint when it comes to applying for new credit cards. Don’t bother applying for cards you don’t think you’ll qualify for since your credit history will get dinged for both the hard inquiry and the card rejection. Instead, look for a card that offers a low interest rate and no annual fee. An added bonus included with many cards is a rewards program that lets you earn points for travel, merchandise or cash back. Before applying for any credit card or store charge card, be sure to read the fine print so you understand the terms and limitations before applying. If you do decide to apply for several new credit cards or loans, try to spread the applications out over several months.

The number of hard inquiries are rarely the reason for a low credit score or denial of credit. According to Fair Isaac, the company that produces FICO credit scores, a hard inquiry will take less than five points off most people’s FICO score. Even so, it’s a good idea to periodically request a free copy of your credit report to check the list of hard inquiries. Records of inquiries you didn’t authorize or from lenders you don’t recognize could be warning signs of identity theft and require further investigation. Notify the credit bureau that issues the report to dispute any errors or unknown inquiries that you find. ■

Sources: experian.com, creditkarma.com and myfico.com.